For a while, it seemed the video gaming sector could never lose.
The industry has seen substantial growth for a number of years, and games and esports analytics firm Newzoo said last year that it expects the global consumer games market to grow at a compounded annual growth rate of 10.3 percent from 2017 to 2021, reaching nearly $180 billion by 2021. In theory, that should boost companies associated with this sector.
But a trio of big names in gaming—Activision Blizzard, Electronic Arts and Take-Two Interactive Software—saw sharp sell-offs in their stocks during last year's fourth quarter. That quarter was lousy for most equities, but those three gaming companies suffered particularly awful losses ranging from 25 percent to 43 percent. They’ve since rebounded, but the downturn left some lingering questions about how industry stalwarts will fare in an era where the most popular video game is free to download and play – Fortnite, by privately held Epic Games.
The two video game exchange-traded funds, the VanEck Vectors Video Gaming and eSports ETF (ESPO) and ETFMG Video Game Tech ETF (GAMR), were pummeled during the fourth quarter, but both are up by double-digit amounts in the first quarter. Given the price retreat in the big names, should long-term investors hit pause or replay on these ETFs?
Michael Pachter, managing director of equity research at Wedbush Securities, who follows the gaming industry, says the worries over Fortnite’s influence were overdone and he sees a strong future for gaming.
“It's investor perception that these [free games] are disruptors that will destroy the current business, that it's an insurmountable obstacle and none of the [traditional firms] could ever make a game that can compete, which is really stupid. They’re all making games to compete,” Pachter says.
Ed Lopez, head of ETF product at VanEck, says the gaming industry itself is changing as it moves from a product that a player downloads to a service where games are online destinations to interact with others, or to be played wherever users want.
“Underlying all of this is the overall demand for online content,” he says.
GAMR and ESPO are trying to stay on top of the shifts in gaming. GAMR takes a broader view of the gaming industry, while ESPO is more narrow.
GAMR follows the EEFund Video Game Tech Index, which has a tiered weighting system. It selects companies that fall into three categories: gaming-only software and hardware companies, entertainment and educational software and hardware companies, and gaming conglomerates. The first two categories comprise 90 percent of the index and are weighted based on market cap in their respective sectors and relative to the index as a whole. The gaming conglomerates make up 10 percent of the index and are equally weighted per sector. The idea is to limit the dominance of the conglomerates and to enable smaller-cap names to have more influence on the fund’s performance.